Speech

28 Feb 2007

Budget Speech

By Sylvia Lim, NCMP

Sir, the Second Finance Minister has outlined increased social spending in the years ahead. This is to be expected of any government faced with an aging population, an increasing income gap and the threat of an underclass developing if the income gap is unchecked. Looking at the Budget offerings, I support the principle behind supplementing low wages and keeping our low wage workers employed.

In an earlier television forum (30 Nov 2006), the Second Finance Minister had said that the increased social spending over the next 5 years would be between $2b to $4b more each year. Indeed, this has been borne out by the figures in this year's budget estimates. The Total Expenditure for FY 2007 amounts to an increase of about $2.4b over the previous year.

Sir, as articulated in the speech by the Member for Hougang yesterday, we in the Workers' Party are not convinced that there is a need to raise Goods and Services Tax by 2% this year. Whether there is a need to raise it at all in the future would depend on the financial information and projections available to us at that time, including the impact of such an increase on our citizens.

Sir, the Budget statement suggests that we will be losing some revenue from the proposed tax restructuring. Key items mentioned were the reduction in the corporate tax rate and some indirect taxes. But the key question is: assuming we do not raise GST, what is the likely net position? Will we still have enough revenues to fund the additional social spending of $2b to $4b per year?

Land sales revenue

The first question we want to ask is why land sales revenue is excluded from the budget.

According to Budget papers, the revenue from land sales is about $4b to $5b per year. This figure by itself is more than sufficient to pay for the increased social spending of $2b to $4b per year.

Economists have noted that excluding land sales from the Budget is overly conservative and not in line with international standards. The argument is that such revenue is recurrent income rather than capital in nature. The government usually leases out land and revenues accrue at regular intervals.

Among those who have criticized our conservative accounting is the International Monetary Fund (ST 15/2/07). They have said that 'The Government's definition of Budget balance underestimates the strength of Singapore's fiscal position as operating revenue excludes a substantial portion of investment income and earnings from land leases,' (2005). Last year, they advised that: 'The authorities should take steps to compile and publish the consolidated public sector accounts in line with international accounting standards.'

Sir, perhaps the government is excluding land sales from the Budget because it fears volatility due to market conditions and we cannot assume the incomes will always be there. Prime Minister had previously used the term "lumpy" to describe such revenues. This is a reasonable concern. However, even if we do not take the entire $4 or $5b income from land sales, surely we can budget based on a portion of the average revenues over the last few years? i.e. Instead of budgeting based on $4b, we could budget based on say half e.g. $2b? Surely the volatility cannot be so severe that we will have a year where land sales generate no revenue at all.

The Organisation for Economic Cooperation and Development (OECD) reported in May 2006 that the Budget principles adopted by the Singapore government tend to under-report its true fiscal strength. Perhaps it is time to adopt the international benchmarks to reflect the true position.

Net Investment Income contribution

One missing piece of the GST debate puzzle is the impending change to the definition of Net Investment Income.

We have been told that the Constitution would be amended to include realized capital gains as part of NII, which up to now was only restricted to interest and dividends. How much additional revenue will be available after the change? In response to our question in Parliament in January, Second Finance Minister said that the government was still working out the formula with the President and the details would only be available in the coming months. He mentioned that they were working on minimizing the volatility of the flows.

However, Prime Minister told Parliament in November that "a significant part of the returns (on reserves) are capital gains" (Hansard, Nov 13). He noted that on the average, we should expect a buffer from the new NII definition. Based on the size of the government’s investments, some economists have provided guesstimates that capital gains could boost NII by another $2b to $3b per year. (ST 15/2/07)

Sir, the government has been telling us that it is "not sufficient" to rely on the expected increase in NII to fund social spending; hence we need to raise GST. But how are we to assess whether that statement is valid or not, if we have no idea about the formula to be used and some ballpark figures about what we can expect from NII?

Since it is only a matter of months before the Constitutional amendment is tabled, why not discuss this whole question of GST increase together with that amendment? It may turn out later that we find that the NII amendment itself can contribute say an additional $2b, and that we can manage the volatility of the flows. When and if that happens, there would be no need to tax the people via the GST increase. Instead, by implementing the GST increase now ahead of the NII amendment, the government is not being fair to those interested to find out whether the GST increase is really needed.

Increased revenues from personal income taxes, statutory board contributions and stamp duty

The next question concerns the increased revenue from other sources such as personal income tax, statutory board contributions and stamp duty.

(Based on Budget Highlights Table 2.1) The government projections for FY 2007 show an increase in collections from personal income tax by $480m. The statutory boards are expected to also contribute $410m more in FY 2007 over the previous year. Together, the increased receipts from these 2 heads of operating revenue amount to close to $1b.

As the property market recovers, and more people buy and sell property, the government’s collections in stamp duty increased significantly last year. It was reported (BT 12/2/07) that stamp duty revenue rose 61% last year, which was the sharpest increase of all tax revenues collected. The amount of $1.3b was about half a billion more than the average annual stamp duty collection in the preceding 5 years.

A reasonable question to ask is whether the uptrend in these revenues will continue. I have also noted the possibility of a reduction in personal income tax in the future. However, the government prognosis is high growth for Singapore in the next 5 years, growth which (quoting MM Lee Kuan Yew) would take us from being in the "lower half of the First World" to the "upper half".

Accordingly, it is reasonable to expect increased revenues from these sources.

Effect of Corporate tax rate cut?

Next, what is the likely effect of the corporate tax rate cut - will the government revenues suffer?

We have been told that the corporate tax cut will cost the government $800m per year.

However, a Business Times report dated 12 Feb 2007 noted that the buoyant economy in 2006 saw corporate tax revenue increase by 17% to $8.3b. Analysts noted that if companies continue to do well, then the tax collections even under the reduced rate will not suffer.

I accept the government's point that that there is a worldwide trend of reducing corporate tax. (BT 22/1/07) KPMG conducted a tax survey covering 86 countries which noted that corporate income taxes across these countries had fallen between 1993 and 2006. However, the same study noted that a corporate tax cut "more often than not pays for itself". Citing Ireland as an example, it noted that the tax cut stimulated growth which in turn enabled Ireland's GDP to go into double digits and attract foreign capital and talent.

Sir, since this is clearly the goal of this government as well, does the government not expect that the cut will stimulate growth and compensate for the paper loss in tax revenue? Will the corporate tax reduction reduce the corporate tax collected? The data suggests that the government may actually end up better off.

Impending revenue from casinos

Next is the question of the Integrated Resorts (IRs). How much would these contribute to the taxman's coffers?

The IRs will be operational in 2009.

Under the Casino Control Act (S 146), the casino operators would need to pay a tax of 5% of the gross gaming revenue from premium players; and 15% of the gross gaming revenue from non-premium players. Casino memberships will also generate turnover which will be taxed. This is not to mention the collateral businesses the government expects to be boosted in the accommodation, food and beverage and retail sectors.

How much tax revenue can the government expect from the IRs? This remains to be seen, of course. Nevertheless, if the expectation of analysts is accurate, the annual casino taxes could reap between US$1b to US$2.5b, which in Singapore dollars is between S$1.5b to S$3.8b.¹(TODAY, 15 Dec 2006). These amounts are equivalent to a GST hike of between 2 to 5%!

If the government were willing, it could manage its existing revenues prudently without increasing GST, and then wait till the casino taxes kicked in around 2010 to assess the position again. This is only 3 years away. According to government expectations, Singapore will continue to do well in the next 5 years. If so, we should be able to manage for the next 3 years till the casino revenues come in.

Timing

Finally, Sir, I would like to touch on the timing of the GST hike announcement.

In November, Prime Minister rightly asked about whether we should increase GST now or wait. He was worried then that Hongkong might reduce its tax rates further and introduce a consumption tax themselves. That has now proven to be unfounded, as the Hongkong government decided to heed the public backlash and find other funding for its budget.

Singaporeans have noted that the announcement of the increase came at the first Parliamentary sitting after the May General Election. They have noted that the ruling party did not forewarn Singaporeans at the polls that this might be one of the first items on its agenda if re-elected. According to Senior Minister, when the ruling party goes to the polls, it would concentrate on telling the people just the good parts and think about how to fund its promises later.

In this same vein, is the government planning its agenda around the election cycle once again i.e. increase GST now, manage the fall-out and assess the situation before holding the next GE?

Based on the additional revenues from other sources, I do not believe that a GST increase is needed now.

So why is the government doing this? The GST increase is a convenient way to tax the people to have a broad-based revenue source. The government wants to be in a comfortable fiscal position and has decided that the people will pay.

Exactly one month ago (28 Jan), I met a man aged about 60 at Ang Mo Kio. He was telling me about his disillusionment with the government and the sequence of events leading to the GST hike. As a feedback on ground sentiment, I would like to share his message with the House. His message to the government was this: "Love people, not things; use things, don't use people".

---

Footnote:

¹ Second Finance Minister responded on 1 March that this is an over-estimate. return to speech